This piece went to press before it emerged that the election was cancelled.

When Alistair Darling was given the job of chancellor in June, he probably did not expect to be setting the scene for a general election just a few weeks later.

It may be that he will be spared this task, and that Tuesday’s double bill of the comprehensive spending review and prebudget report will be a stand-alone announcement, if Gordon Brown decides the polls are too close to risk going to the country.

But Darling is in the spotlight, and under pressure as a result of some eyecatching tax announcements by George Osborne, his Conservative shadow, last week. Having criticised the Tories before, let me congratulate them now.

Raising the inheritance-tax threshold to £1m may not mean much in Wigan or Walsall but it means quite a lot to southern voters, who are in any case most resistant to Brown’s charms. As chancellor, he was blissfully unaware of the anger about inheritance tax.

Likewise, exempting first-time buyers from stamp duty responded to the anger among young people that the rise in house prices squeezed them out of home ownership and the government did nothing about it.

The political masterstroke, though, was paying for all this by a £25,000 annual levy on “nondoms”, people who live in Britain but are nondomiciled for tax purposes. Two popular tax cuts, in other words, paid for by a popular tax increase. There has been smouldering resentment about the fact that Brown promised to do something about nondoms but did not.

Do the Tory numbers add up? An exchange of letters between Osborne’s office and the Treasury permanent secretary has left us in the position that Whitehall cannot say with certainty they do not. Raising £3.5 billion in a painless way is testing but it appears that, years after promising to tackle the nondom anomaly, the Treasury has not done enough work on it. That may mean the nondom levy could not be a policy for a government, at least not straightaway. It was, however, a great piece of opposition politics.

How will Darling respond? This is where you have to feel a bit sorry for him. With the public finances veering towards another overshoot, he has no preelection cash to spread around, though he will make a series of “green” tax announcements and make detailed proposals on the tax treatment of private equity, to be put out for consultation.

He has already hinted at a downward revision of the government’s 2.5% to 3% growth forecast for next year, which on the face of it is not the ideal backdrop to an election, though this will be more of a downward nudge than a slash.

This is obviously an important component in Brown’s decision on election timing. How nasty is the economy going to get?

We are seeing several forces impacting on it. There are the five increases in interest rates by the Bank of England since August last year; there is the additional impact of the tightening of credit conditions arising from the crisis in debt markets; and there is the government’s comprehensive spending review, which will be sold as directing billions more of taxpayers’ largesse towards education and the NHS, but which will mark a sharp slowdown in real spending growth from roughly 4% a year over the past eight years to 2% for the next three.

Expect a big emphasis from Darling on efficiency savings and “sound public finances”, which he will contrast with what he will claim are unfunded Tory commitments. Prudence, it appears, is making a comeback, after taking a holiday in Brown’s latter days at the Treasury.

What will be the net effect of all this? The credit crisis and past rate hikes will take the edge off the global economy, though only to the extent that its recent supercharged growth rate of 5%-plus reverts to something like a more normal 4%.

There will also be a direct effect on the UK. When I argued a few months ago the Bank did not need to raise rates beyond 5.5%, it was in anticipation of the slowdown in consumer spending and the housing market we are seeing.

There is now clear evidence in a drop in mortgage approvals to 109,000 in August and weaker survey numbers for retail sales. The Halifax reported a 0.6% drop in house prices last month, consistent with a slowing market. Consumer confidence actually recovered, according to the Nationwide, though its readings were taken before Northern Rock dominated news bulletins.

A slowdown in consumer spending and the housing market is long overdue and is occurring. It will be reinforced by what Andy Hornby, chief executive of HBOS, described as a “fundamental shift” in the mortgage market, as lenders seek to restore margins and take a tougher attitude towards risk.

How slow could growth be? The gloomiest forecast you will find is from Peter Warburton’s Economic Perspectives, which predicts a 0.3% decline in gross domestic product next year. That is an outlier but there are now quite a few forecasts starting with a one, including the Centre for Economics and Business Research, 1.4%, and Lehman Brothers, 1.7%. The consensus is roughly 2%.

Does this argue for a quick poll, an economic “cut and run”? John Major famously won in April 1992 at the tail-end of the longest recession in the postwar period. Labour, despite recent poll oscillations, may take comfort from the belief that in times of uncertainty, voters stick with what they know, as in Hilaire Belloc’s “Always keep a hold of Nurse/For fear of finding something worse”.

Against this, voters also punish governments for past errors. That was one reason why the Tories lost in 1997; the legacy of sterling’s Black Wednesday exit from the European exchange-rate mechanism and big tax hikes. Harold Wilson lost in 1970 as punishment for the 1967 “pound in your pocket” devaluation.

Despite higher taxes, the raid on pension funds, mismanagement of tax credits, the wasteful splurge in public spending and the rest, Labour under Tony Blair was not seen by voters as having done enough to deserve serious punishment, though its majority was eroded. Lower interest rates were an antidote to higher taxes.

So the real economic gamble for Brown is not the extent of next year’s downturn. It is whether, if he hangs around too long, his past crimes will catch up with him.

PS If not now, when? Nobody was surprised when the Bank of England’s monetary policy committee (MPC) left interest rates on hold on Thursday. Many are looking to November, an inflation-report month, with the next meeting on November 7-8. That could mean, depending on Brown’s poll announcement, a postelection rate cut. If the election was on November 8, even an independent Bank would find it hard to announce a reduction in the cost of borrowing. It may be, however, that people have got ahead of themselves. The MPC has shifted ground since August, when its inflation report pointed to the need for one more hike in Bank rate to 6%. Whether it has shifted enough for a cut yet is more questionable.

There is another argument for caution. A few months ago, when criticism rained down on the Bank because Mervyn King had to write his open letter to the chancellor explaining inflation’s rise above 3%, it stiffened the MPC’s resolve. Two subsequent rate hikes came sooner than they might have done, and the Bank’s language got tougher.

Now the Bank is licking its wounds from the Northern Rock/ money-market crisis, when it was criticised even more, including a front cover of The Economist (UK edition only), adorned with a picture of King and the headline “The Bank that failed”. Even so, the MPC may see moving early on rates as another risk to credibility, a sign it is bending too easily with the wind. In which case, we may have to wait longer.

From The Sunday Times, October 7 2007

Comments

there is no anger about inheritance tax. a few millionaires with fortunes they did nothing for, reduced by a little. bizarre.

Brown is responsible for squandering billions for nothing. The public have no better services than when he came to power. health, education, pensions, household expenditure are all more expensive.

the chickens are coming home to roost and I hope Gordenron Brown is there to face the music. I notice Bliar has done a runner before the sith (anag.) hits the fan.

Thanks for Paul C's comment on betting odds on the previous post, which was useful. Otherwise, a pretty poor standard of comment coming through - all these chickens coming home to roost. £1.33 trillion is not only slightly less than the running total for household debt - the overwhelming bulk of which is secured - but it is also less than 100% of GDP. As for inheritance tax, if you think you have to be a millionaire to pay it, either you don't know anything about the tax system or you've got a good accountant. Actually it is probably the millionaires who don't pay it.

The thing is with the secured debt is that its secured against assets that's value is mearly based on opinion, supported by available finance. What will happen to the value of the assets if the credit crunch REALLY starts to bite?

The asset value is just current opinion, where the debt incurred to aquire the asset is very real.

People often say this, but it doesn't take us very far. The value of the housing stock - £3,800 billion - would have to fall a very long way to come anywhere close to the £1,100 billion or so of mortgages secured on it.

Well when the US Sub Prime (not to even mention the UK Sub Prime) starts affect the country, you'd probably be lucky to get any money from anywhere, as Northern Rock found. So when this does finally unwind I think it's fair to say values will not only collapse, but collapse quickly as there simply won't be the money available to support the prices.

I have to ask why £10bn worth of BoE loans were shunned the other week by most banks? Was it the horriffic cost that put the banks off, or did they simply look at it and say, on top of the sub prime woes, we're not going to take on increased exposure at that exorbitant cost when we don't even know the extent of our current exposure in our own back yard? It's kinda like knowing you've been shot in the foot somewhere, and taking a loan of the BoE is like shooting yourself in the other foot.

* Total UK personal debt at the end of August 2007 stood at £1,363bn a growth rate increase to 9.9% for the previous 12 months which equates to an increase of £115bn.

* Total secured lending on homes at the end of August 2007 stood at £1,148bn. This has increased 10.8% in the last 12 months.

* Total consumer credit lending to individuals in August 2007 was £215bn. This has increased 5.5% in the last 12 months.

* Total lending in August 2007 grew by £9.5bn. Secured lending grew by £8.5bn in the month. Consumer credit lending grew by £1.0bn.

*Average household debt in the UK is £8,873.
*Average household debt in the UK is £56,309.
*Average owed by every UK adult is £28,707 (including mortgages).
*Average outstanding mortgage for the 11.8m households who currently have mortgages is £97,209.
*Average interest paid by each household on their total debt is approximately £3,725 each year (this equates to 9% of take home pay).
*Average consumer borrowing via credit cards, motor and retail finance deals, overdrafts and unsecured personal loans has risen to £4,524 per average UK adult at the end of August 2007.
*Britain's personal debt is increasing by £1 million every 4 minutes.

Oh and by the way:

*77 properties will be repossessed today
*317 people today will be declared insolvent or bankrupt
*2,750 County Court Judgements (CCJs) will be issued
*Citizen Advice Bureaux will deal with 6,600 debt problems, enquiries to them having hit a record high, increasing by 20% in the last year to 1.7 million in 2006/07 and doubling in last 10 years and more than 7,716 loan repayments are going unpaid every day.

*12.7 million people have taken out a loan to consolidate some or all of their existing borrowing and 8.4 million people (66%) continue to build up even more debt.
*14,000 properties (77 a day) were taken into possession in the first six months of 2007. This rose by nearly 18% compared with the previous half-year, and nearly 30% compared with the first half of 2006.
*The number of mortgages in arrears of three months or more at the end of June 2007 rose to an estimated 125,100, up 4% compared with the end of December 2006.
*8.2m British adults are in serious debt and 2.1m are struggling with repayments according to the latest quarterly research commissioned by Thomas Charles and conducted by YouGov. They found that 18% adults in Britain have £10k or more of unsecured debt, equivalent to 8.2 million adults. This is a rise of 30% on last year.
*Over two million British consumers (6%) cannot quantify how much debt they're in, according to research carried out by Unbiased.co.uk.
*Around a quarter of working Britons will be refused loans, mortgages and credit cards by 2011 as they struggle with mounting debts. Analyst Datamonitor said the number of borrowers blacklisted by mainstream lenders will increase from 7 million to 8.6 million over the next four years.
*Borrowing costs hit a six-year high as the Bank of England pushed up interest rates in July 2007 by a quarter-point to 5.75% following a jump in inflation. This was the fifth rise in 12 months.

*More than 160,000 people contacted the Consumer Credit Counselling Service (CCCS) in the first half of this year - an increase of 18.5% on the same period last year.
*Personal debt as a proportion of income has risen from 105% in 1997 to 164% in 2006 - the highest ever recorded and the highest in the developed world.
*The number of county court judgments (CCJs) has risen to a near 10-year high. A total of 247,187 consumer debt related CCJs were issued in the first three months of the year - the highest quarterly total since the summer of 1997.

partners.
*Citizens Advice Bureau (CAB) clients have an average of £13,000 of debt which is nearly 17.5 times their monthly income. On average it would take CAB clients 77 years to pay back their debts in full.

And Mr. Brown doesn't want to go to the country? Or was it that he really did but couldn't? Perhaps he was worried about losing his seat to Alex Salmond's SNP and that was the real reason why?

It's no use uncritically churning out statistics, without setting them in some kind of context, and without making a judgment on which ones make any sense. The one about more than 8m people being in serious debt, for example, is just naive extrapolation. The number of properties in arrears at the end of June was down on a year earlier. Yes, 14,000 properties were repossessed in the first half of the year but this was just 0.1% of mortgaged properties. If 77 homes were repossessed today, it is also the case that more than 1,000 first-time buyers moved into their new homes.

It is a fair point to say that debt and assets are not perfectly aligned - some people are asset-rich and have no debt, and vice versa. But it is also the case that the rise in mortgage debt over the past decade has lagged well behind the rise in house prices, giving the vast majority of people a substantial equity cushion.

I'm curious as to what you think the main difference in economic policies are between Labour and the Conservatives, if any? I would suggest there isn't a great deal of difference, and I doubt the economic situation would be much different now whoever was in power.

Also, I always thought there had to be a compelling reason or issue to call an election? Is there one (besides the war, which both major parties agreed upon).

But not too many differences in economic policy surely...I think the fact that inheritance tax is an issue both Labour and the Conservatives are giving so much attention, is just one reason as to why so many people have become politically alienated.

By the way, it is difficult for the average person to swallow the government line about fiscal competency when so much money has been wasted on the war, ID cards, the tax credit fiasco, NHS computers and I'm sure someone could add to that list. Add in a ridiculously over budget Olympic games. How much of the 'government waste' Alisitair Darling alluded to is there own doing?

However, despite the lack of necessity of calling an election now, it may have been Brown's best chance. I seriously doubt the economy is going to be any better when the election does have to be called.

All the economics you need. Welcome to EconomicsUK, the personal website of David Smith, Economics Editor of The Sunday Times, London.

The site, independent of the newspaper, aims to provide knowledge and stimulate debate on economics, for business people, students,economists and others. As well as my own articles and observations, it also includes material by other people and organisations, which is always welcome. Enjoy the site, and please take part in our forum.